The cost of living increase is energy

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Increased gas and electricity prices account for almost the entire rise in the UK cost of living since 1997 according to Patrick Collinson in the Guardian:

“The average rise in prices for a basket of goods between 1997 and 2016 was 50.7%, but utility bills went up by 139% – far outstripping the average 78% rise in weekly household income, which has gone up from £316 to £562 over the period.”

Reflecting the standard (and probably wrong) narrative, Collinson blames the energy companies. While the “big six” (soon to be five) energy companies have enjoyed a generous regulatory regime, their rate of profit has been relatively stable. This suggests that other factors are also involved. One such is government subsidies for green and nuclear energy projects which have been added onto energy bills. However, it is worth also bearing in mind what has happened to UK energy over the period.

UK oil and gas production peaked in 1999; and has fallen by more than 60 percent since then. By 2006, the UK had become a net importer of oil and gas. At the same time, world oil and gas prices spiked; prompting the rise in interest rates that kicked off the 2008 financial crash. Prices remained eye-wateringly high until mid-2014 when rising inventories and lower demand in western economies crashed prices. More recently, as a result of the phasing out of coal and inadequate replacement generating capacity, the UK is also importing (at a price) a growing proportion of its electricity.

In short, one reason that energy bills have risen is that the cost of energy has risen. This also explains why just about everything else – including our wages – has stagnated. Without energy our households and businesses would grind to a halt. We have no choice but to pay for it. If the price of energy increases, we have to make cuts elsewhere (including to wages). The result is that energy is taking up a rising proportion of GDP; crowding out other economic activities.

We can – and should – tinker around the edges; using regulation or nationalisation to curb the excess profits of energy companies; and using tax and spending policies to redistribute income from rich to poor to curb fuel poverty. But this is only (slightly) softening the blow. What we need if we are to avoid the cost of energy eating up an ever rising share of GDP, is a cheap and abundant alternative to the fossil carbon that we burned back in the 1950s and 1960s heyday of economic growth. The bad news is that to date, no such alternative exists.

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